UUU - Mining Story We Have Heard BeforeUranium One Is a Mining Story We Have Heard Before
By Tim Cohen
25 Feb 2008 at 08:58 AM GMT-05:00
JOHANNESBURG (Business Day) -- Every now and then, the mining industry throws up a spectacular cautionary tale, and so it was last Friday when Uranium One [TSX:UUU] tanked yet again. The elements of the cautionary tale are so classic and so often repeated, you wonder in retrospect how investors could have been conned so absolutely. Until of course it happens again.
The elements of the cautionary tale are these:
First, a convincing and charismatic CEO. In this case it was Neil Froneman who stood down on Friday and who has been a vocal advocate of the notion that uranium is substantially underpriced.
Froneman's argument has always been that the sweep of history was moving decisively in favour of the uranium price, since global warming has fundamentally changed attitudes towards nuclear power.
In addition, because of the dangers of this form of energy, the regulatory stringency in generating production would have the effect of limiting supply. He once said that although he could not speculate about whether the share price of Uranium One was underpriced, he had no doubt that the uranium price was too low. The price subsequently declined.
Second, a dramatic increase in the share price, based not on a production increase but on expectations of a production increase. On Friday, Uranium One announced that its production forecast decreased 32%, which would have been dramatic enough if it weren't for the fact that it was the second dramatic decrease in production guidance. The first, in October last year, was supposed to provide a strong basis for achievable targets, so the further reduction constitutes not so much a gradual downgrading of prospects, but something more akin to operational failure.
Third, the "dramatic and exciting discovery" fallacy, into which mining investors often slide. In this case it was the Dominion mine at Klerksdorp which was supposed to be the company's cornerstone money spinner, and which was the main culprit of the production downgrade announced on Friday. This is a mine which has just begun producing anything at all. Far from being the cornerstone, the downgrading of expected production verges on being calamitous for the company's future prospects.
It's interesting to note that the bullish story continues, with the company reporting a dramatic 73% increase in indicated resources.
It did acknowledge that grades were down 22% to 0.063% from 0.081%. Consequently, setting the one off against the other, the global resource base was - you guessed it - about the same as initially estimated.
Fourth, a supposedly confident CEO who is actually a net seller. Bloomberg reported late last year that two directors of Uranium One sold about R40 million (C$5.2 million) in shares.
The vast majority were sold by Froneman who banked R32 million (C$4.1 million) while nonexecutive director Mark Wheatley cashed in R8 million (C$1 million). Froneman's argument at the time - and at this you have to slightly guffaw - was that investors ought to be impressed by the fact that he had not sold more. "If this was as good as it gets, I would have exercised a hell of a lot more." As it turns out it was in fact as good as it got.
Fifth, aggressive acquisition. Boosted by a soaring share price, the company went on a bit of an acquisition endeavour, buying resources in the U.S. and Kazakhstan. In retrospect, you can't help feeling that management would have been better occupied concentrating on getting production going at its existing mines.
Sixth, and most obvious, a soaring share price. Uranium One was one of the biggest winners on the JSE last year, and its share price doubled from R35 to R84. On the TSX, shares went from C$16.00 to C$9.00, although hit C$18.65 in late April.
It's often said that if something looks too good to be true, then it probably is. But the problem for the company is that there are now residual concerns about the high levels of trade in the shares prior to disappointing announcements. That can in itself be the cause of a stock overhang.
Where does this leave the company now? At the broadest level, the company's credibility has taken a severe hit. From a market attitude of general appreciation for the broad thrust of the uranium story, interim CEO Jean Nortier's first job has to be to actually demonstrate concrete production results. Appetite for the shares will from henceforth be not on the basis of the company's prospects, or even necessarily on the basis of movements in the uranium spot price, but on the basis of production success. Froneman's departure actually helps here, since it suggests at least the possibility of a new start.
The more pressing issue will be cash. The company's ability to cover its cash requirements will be a continuing question, and it may be forced to divest itself of its 68% stake in Aflease Gold. The other open question is whether it is now a takeover target. In a way, the company is perversely protected from predators by the uncertainty that hangs over the stock. However crucial production performance may be, actually delivering could stir the vultures into action.
Read RI's full coverage on Friday.